State Regulation: What Does the Next 10 Years Look Like?

The 10th anniversary of anything is special. It can make you realize how much has changed. When I think back to the 10th anniversary of joining CSBS in 2007, it seems like a world away.

Around this time, state regulators had grown concerned about problems in the mortgage market, which had become the Wild West of financial services. A few regulators, led by Gavin Gee of Idaho, were working on an idea: a nationwide system to license mortgage professionals.

Soon thereafter, the financial crisis happened, mortgage markets collapsed, and Congress sought ways to ensure accountability and transparency in that sector. One solution: mandating the use of our licensing system. Suddenly, our idea had become national public policy.

The development and deployment of NMLS, the Nationwide Multistate Licensing System, forever changed an industry. It created the means to validate mortgage professionals -- in the eyes of both regulators and the public -- as properly licensed and operating in good standing, a development that helped bring much-needed stability to a troubled market.

Now, here we are, 10 years after the formal launch of NMLS. And much like the graying of my hair, the NMLS in 2018 looks different than the NMLS of 2008.

We have become a repository of an enormous amount of data – on 23,000 companies, half-a-million individuals, and countless transactions -- that other regulators and federal agencies rely on: the CFPB, FinCen, FTC, and Office of Financial Research. We conduct criminal background checks, supported by the FBI, through NMLS. Surety bonds can be generated electronically.

What’s more, state regulators have expanded their use of NMLS to other non-banking industries, such as money transmission, debt collection, and consumer finance. Call Reports have been established for mortgages and money services businesses (MSBs). Industry and consumers use a web-based portal to check on companies, individuals and any adverse regulatory actions. Fifty-nine state agencies use NMLS for mortgages, and 42 do so for MSBs.

That is a lot of progress in a single decade. Now, NMLS did not cure all issues of mortgage supervision; there is still work to do. But the 10-year mark of NMLS is worthy of celebration.

Today, we are asking ourselves, “What does the next 10 years look like?”

We start with an assumption: nonbanks are here to stay. Ten years removed from the financial crisis, nonbanks are still originating almost half of all residential mortgages. Based on our Call Report data, MSBs transferred more than $1 trillion in 2017. Both are impressive figures, and indicative of the future.

As nonbanks modernize the financial services industry, we as regulators are modernizing the state regulation of nonbanks. We must ensure safety and soundness and consumer protection in this sector. We must do so in a way that enables business innovation that can benefit local communities. And that means properly addressing fintech. From our discussions with fintech companies, we have seen how greater use of technology is altering business models, delivery systems, and customer experiences.

That’s why states have been exploring how fintechs and other nonbanks can become licensed more quickly and scale regionally or nationally more easily, while regulators provide increased focus on core issues of risk. We are mindful that our approvals, when we give them, must set a high standard that creates confidence in consumers who wish to use fintechs and other new firms.

At CSBS, we have given shape and form to our plan. Last spring, state regulators adopted a policy statement that commits them to achieving an integrated, 50-state system of licensing and supervision for nonbanks. We have since identified several initiatives to achieve this goal -- which collectively we refer to as Vision 2020 – and we have made good progress.

A fintech industry advisory panel, organized by CSBS, to help identify pain points in the multi-state experience and develop possible solutions. Thirty-three companies serve on our panel, with subgroups on money transmission and lending. These industry leaders have met multiple times with state regulators, and are working on recommendations.

State-level activity to harmonize differences in licensing and supervisory practices. We have already seen several states come together on a multistate agreement to streamline the licensing process in those states. We expect further efforts to emerge.

A next generation technology platform, developed and operated by CSBS, that becomes a one-stop shop for licensing as well as supervision. One that enhances NMLS to leverage data analytics to streamline the multi-state licensing process. One that expands NMLS to include a new system where state examiners can better identify company risks, standardize more of the exam process, and more easily share information with other states. We have been working on the licensing component, which we will deploy first. Then it will be followed the new supervisory system.

Training and a new state accreditation system, offered by CSBS, that enable and validate state efforts to modernize their banking departments. Improvements such as identifying and addressing weaknesses, focusing expertise where it is most needed, comparing and learning from other states, and updating supervisory processes. Our training programs are ongoing. And we just deployed an accreditation online system.

The message is clear: the states are energized and they are active.

They see how these and related initiatives will help modernize the state regulatory system for nonbanks. Setting high standards. Harmonizing differences among the states. Producing more and better decisions in less time. Creating more accountability and integrity for new industry sectors. And doing all this while protecting personal data and consumers from bad actors.

One important point should not be lost: state regulators are addressing a technology-powered development – the friction fintechs are experiencing in the multistate arena – with technology-powered solutions of our own.

Makes us remember that our answers often lay in the questions themselves. That was true 10 years ago. It is true today. And it will be true 10 years from now.

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